The FHA's nose dive

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Monday, November 16, 2009

THE COST of the housing bailout continues to rise. The government-run mortgage giant Fannie Mae requested another $15 billion from the Treasury this month, to help cover a loss of $19.8 billion in the third quarter. That brings the total tab for rescuing Fannie to $60 billion so far. Fannie's twin, Freddie Mac, has received $51 billion. And now comes news that the capital reserves of the Federal Housing Administration (FHA) have fallen to $3.6 billion, which is just one-half of 1 percent of the $685 billion in loans insured by the agency and well below the statutory minimum of 2 percent.

Does this mean that Congress will soon be shoveling more billions into the FHA? Possibly. But it's important to understand the precise nature of the FHA's predicament. Whereas Fannie and Freddie are in the business of securitizing mortgages, the FHA insures them directly. Borrowers of modest means can get houses with as little as 3.5 percent down; if they default, the FHA pays off the lender from accumulated insurance premiums. During the bubble, subprime firms "served" anyone with a remotely plausible ability to borrow, and the FHA's market share waned. The FHA tried to compete by accepting down payments supplied by sellers to borrowers via nonprofit organizations. These were, in effect, loans of very poor quality that required no down payment, and they have been defaulting in bunches. The FHA says that, without these clunkers in its portfolio, the agency could meet the statutory capital requirements today.

In the past year, as private investors have left the mortgage field, Congress and the White House (under President George W. Bush and President Obama alike) have encouraged the FHA to fill the void. The agency insured $360 billion worth of single-family loans in fiscal 2009 -- five times as much as it insured in fiscal 2005. Today, about half of first-time homebuyers turn to the FHA. Though quite a few of these new loans are of questionable quality, too, the FHA says that the average quality of its booming portfolio has increased, if only because good borrowers have so few alternatives.

Low as its reserves are, the agency estimates that the insurance premiums from a growing, new book of business will enable it to cover, just barely, losses from the rapidly decaying old book, after which it can rebuild reserves. You could compare the FHA to the pilot of an acrobatic biplane: in a nosedive but capable of pulling out of it in the nick of time. If the housing market performs worse than the FHA's current worst-case scenarios, however, the agency will crash and burn.

The problem here is that the government is taking taxpayers on such a death-defying ride in the first place. Like Fannie Mae and Freddie Mac, the FHA represented a huge federal gamble on the politically popular cause of homeownership. Now that Washington has lost that bet, it is doubling down, in a bid to prop up home prices just enough to prevent a wider collapse of the economy. Perhaps this stopgap will work, perhaps not. Certainly it's odd that the FHA is helping people get houses with very little equity even as rental vacancies are running at an all-time high of 11.1 percent. But the broader lesson is that federal subsidies have made the entire economy dangerously dependent on single-family housing. The sooner Congress and the president go to work on a long-term fix for that fundamental problem, the better.


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